Results

• 9MFY16 core net profit of RM733.4m (-45.5% yoy) came in below expectations, accounting for only 41% of our and consensus full-year net profit forecast.

Deviation

• Higher than expected depreciation due to change in accounting policy.

• Lower than expected sales and margin for industrial and motor divisions.

Dividends

• -

Highlights

• 3QFY16 core net profit was down 56.4% qoq (-65.1% yoy) mainly due to weaker performance in plantation, motor, energy & utilities divisions. Its industrial division reported better qoq performance with savings from cost-cutting measures in Australasia and improved performance in China/HK market. On the other hand, performance of its property division was boosted by the asset monetisation exercise where it recorded gain of RM406.3m from deconsolidation of two subsidiaries in Singapore and RM138.7m gain from compulsory land acquisition for the Damansara-Shah Alam Elevated Expressway and West Coast Expressway.

• 4Q to be seasonally stronger. 4Q is usually the strongest quarter for Sime especially for its property divisions with better sales and more profit recognition during the quarter. Also, plantation division is likely to perform better with higher CPO prices while its industrial division will continue to enjoy cost savings from previous restructuring activities.

• Deleveraging activities on track. Sime has completed a perpetual subordinated sukuk issuance of RM2.2b and the proceed was used to pare down its debt and brought down the gearing level to 0.48x as at 31 Mar 15 from 0.61x as at end Dec 15. While Sime has deconsolidated two of its subsidiaries in Singapore for RM600.8m, the disposal of its third property in Singapore is expected to be completed by end FY16. Further to that, the asset monetisation exercise on its 14 industrial assets in Australia is targeted to be completed by FY17.

Risks

• Sharp fall in FFB output and/or palm product prices;
• Prolonged weak demand for mining equipment; and
• Delay in property launches.

Forecasts

• We lower our net profit forecasts by 15% for FY16 and 5% for FY17, largely to account for higher depreciation and amortisation due to change in accounting policy, lower than expected sales and margin for industrial and motor divisions.

Rating

HOLD

Positives

• Strong balance sheet.

Negatives

• (1) Cooling economic activities in China and Australia may have an adverse impact on Sime Darby’s earnings; and (2) Overseas expansion risk.

Valuation

• Maintain HOLD with lower target price of RM6.95 (previous TP: RM7.00) based on SOP.

Source: Hong Leong Investment Bank Research - 26 May 2016